the standard fire insurance co. v. knowles, cato legal briefs

7/31/2019 The Standard Fire Insurance Co. v. Knowles, Cato Legal Briefs

1/31

No. 11-1450================================================================

------------------------------------------------------------------

THE STANDARD FIRE INSURANCE COMPANY,

Petitioner,v.

GREG KNOWLES,

Respondent.

------------------------------------------------------------------

On Writ Of Certiorari To TheUnited States Court Of Appeals

For The Eighth Circuit

------------------------------------------------------------------

BRIEF OF THE CATO INSTITUTE ASAMICUSCURIAE IN SUPPORT OF THE PETITIONER

------------------------------------------------------------------

ILYASHAPIROCATO INSTITUTE1000 Mass. Ave., N.W.Washington, D.C. 20001

(202) [email protected]

DAVID B. RIVKIN, JR.Counsel of Record

ANDREW M. GROSSMANBAKER & HOSTETLER LLP

1050 Conn. Ave., N.W.Washington Sq., Suite 1100Washington, D.C. 20036(202) [email protected]

DEBORAH H. RENNERJOHN B. LEWISPAUL G. KARLSGODTCASIE D. COLLIGNONROBIN D. POWELLBAKER & HOSTETLER LLP

Counsel for Amicus Curiae

================================================================COCKLE LAW BRIEF PRINTING CO. (800) 225-6964

OR CALL COLLECT (402) 342-2831


2/31

i

QUESTION PRESENTED

Whether, consistent with the Due Process Clause

of the Fifth Amendment and the Class Action Fair-

ness Act of 2005, a named plaintiff may stipulate that

the amount in controversy, including the claims ofabsent class members, does not exceed $5 million so

as to defeat a defendants right of removal.


3/31

ii

TABLE OF CONTENTS

Page

Question Presented ............................................. i

Table of Contents ................................................. ii

Table of Authorities ............................................. iiiInterest of theAmicus Curiae ............................. 1

Introduction and Summary of the Argument ...... 1

Argument ............................................................. 3

I. Due Process Requirements Preclude Pre-Certification Stipulations that Trade

Away Class Members Claims .................... 3

II. Due Process Requires Satisfaction of theRule 23 Criteria, Including Adequacy of

Representation,Before Absent Class Mem-bers May Be Bound .................................... 7

III. The Eighth Circuits Approach Is Contraryto CAFAs Text and Purpose of Protec-ting Absent Class Members Due ProcessRights ......................................................... 11

IV. Post Hoc Notice and Other Actions Can-not Cure Due Process Violations Stem-ming From Binding Decisions MadePrior to Class Certification ....................... 18

Conclusion............................................................ 23


4/31

iii

TABLE OF AUTHORITIES

Page

CASES

Amchem Prods.,Inc. v. Windsor, 521 U.S. 591

(1997) .........................................................................2Anderson v. Bayer Corp., 610 F.3d 390 (7th Cir.

2010) ..........................................................................6

Arch v. American Tobacco Corporation,Inc.,175 F.R.D. 469 (E.D. Penn. 1997) .............................6

Avery v. State Farm Mut. Auto Ins. Co., 746N.E.2d 1242 (Ill. App. 2001) ...................................13

Back Doctors Ltd. v. Metro. Prop. & CasualtyIns. Co., 637 F.3d 827 (7th Cir. 2011) ........... 9, 20, 22

Bass v. Carmax Auto Superstores,Inc., No. 07-0883-cv-W-ODS, 2008 WL 441962 (W.D. Mo.Feb. 14, 2008) .......................................................... 22

Davis v. Cannon Chevrolet-Olds,Inc., 182 F.3d792 (11th Cir. 1999) .................................................13

Devlin v. Scardeletti, 536 U.S. 1 (2002) .......................7

Dow Chemical Co. v. Stephenson, 593 U.S. 111(2003) .........................................................................8

Eisen v. Carlisle & Jacquelin, 417 U.S. 156

(1974) ....................................................................... 19Feinstein v. Firestone Tire and Rubber Co., 535

F. Supp. 595 (S.D.N.Y. 1982) ....................................5

Frederick v. Hartford Underwriters Ins. Co.,2012 WL 2443100 (10th Cir. June 28, 2012) ............9

Freeman v. Blue Ridge Paper Products,Inc.,551 F. 3d 405 (6th Cir. 2008) ....................................6


5/31

iv

TABLE OF AUTHORITIES Continued

Page

Goodner v. Clayton Homes, No. 4:12-cv-04001,2012 WL 3961306 (W.D. Ark. Sept. 10, 2012) ........20

Hall v. ITT Financial Services, 891 F. Supp.580 (M.D. Ala. 1994) ............................................... 22

Hansberry v. Lee, 311 U.S. 32 (1940) ................. 1, 8, 19

Hubbard v. Electronic Arts,Inc., Nos. 2:09-CV-233, 2:09-CV-234, 2011 WL 2792048 (E.D.Tenn. July 18, 2011) ..................................................6

Krueger v. Wyeth,Inc., No. 03-cv-2496, 2008WL 481956 (S.D. Cal. Feb. 19, 2008) .......................5

Lowdermilk v. U.S. Bank Natl Assn, 479 F.3d994 (9th Cir. 2007) ..................................................10

Manguno v. Prudential Prop. & Cas. Ins. Co.,276 F.3d 720 (5th Cir. 2002) ............................. 10, 22

Martin v. Wilks, 490 U.S. 755 (1989) ...........................7

McClendon v. Chubb Corp., No. 2:11-cv-02034,2011 WL 3555649 (W.D. Ark. Aug. 11, 2011) ......... 21

Mullane v. Cent. Hanover Bank & Trust Co.,339 U.S. 306 (1950) ............................................. 4, 19

Murphy v. Reebok Intl,Ltd., No. 4:11-cv-214-

DPM, 2011 WL 1559234 (E.D. Ark. Apr. 22,2011) ........................................................................ 21

Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) ...........4

Pearl v. Allied Corporation, 102 F.R.D. 921(E.D. Pa. 1984) ..........................................................5

Phillips Petroleum Co. v. Shutts, 472 U.S. 797(1985) ........................................................... 2, 4, 8, 18


6/31

v


Page

Richards v. Jefferson County, Ala., 517 U.S.793 (1996) ........................................................ 4, 7, 19

Rolwing v. Nestle Holdings,Inc., 666 F.3d 1069(8th Cir. 2012) ...........................................................9

Simpson Housing Solutions,LLC v. Hernan-dez, 347 S.W. 3d 1 (Ark. 2009) ................................ 18

Smith v. Am. Bankers Ins. Co., No. 2:11-cv-02113, 2011 WL 6090275 (W.D. Ark. Dec. 7,2011) ........................................................................ 21

Smith v. Bayer Corp., 131 S.Ct. 2368 (2011) ..... 7, 8, 19

Smith v. Nationwide Prop. & Cas. Ins. Co., 505F.3d 405 (6th Cir. 2007) .......................................... 10

Stephenson v. Dow Chem. Co., 273 F.3d 249 (2dCir. 2001) ...................................................................9

Tanoh v. Dow Chemical Co., 561 F.3d 945 (9thCir. 2009) ...................................................................6

Taylor v. Sturgell, 553 U.S. 880 (2008) ........................7

Thomas v. Countrywide Home Loans, No. 3:11-cv-399-WKW, 2012 WL 527482 (M.D. Ala.Feb. 17, 2012) .......................................................... 22

Tuberville v. New Balance Ath. Shoe,Inc., No.1:11-cv-01016, 2011 WL 1527716 (W.D. Ark.Apr. 21, 2011) ..........................................................21

Wal-Mart Stores,Inc. v. Dukes, 131 S.Ct. 2541(2011) .........................................................................5


7/31

vi


Page

STATUTESAND RULES

28 U.S.C. 1332 ................................................... 16, 17

28 U.S.C. 1712 .........................................................1528 U.S.C. 1715 .........................................................15

Class Action Fairness Act of 2005, Pub. L. No.109-2, 119 Stat. 4 (2005) ...........................................3

Fed. R. Civ. P. 23 ......................................... 2, 7, 8, 9, 19

OTHER AUTHORITIES

The Class Action Fairness Act of 1999: Hearingon S. 353 Before the Subcomm. on Adm.

Oversight and the Courts of the S. Comm. onthe Judiciary, 106th Cong. (1999) ..........................14

151 Cong. Rec. H685 (2005) ............... 12, 13, 14, 15, 16

151 Cong. Rec. S1157 (2005) .................................. 3, 13

John Beisner, Jessica Davidson Miller, TheyreMaking a Federal Case Out of It . . . In StateCourt, 25 Harv. J. L. & Pub. Poly 143, 169(2001) ................................................................. 12, 13

John Coffee, Jr., Class Action Accountability:

Reconciling Exit, Voice, and Loyalty in Rep-resentative Litigation, 100 Colum. L. Rev.370 (2000) ................................................................ 11

John Massaro, The Emerging Federal ClassAction Brand, 59 Clev. St. L. Rev. 645 (2011) ........ 16

Restatement (Second) of Judgments 4 (1982) ..........8


8/31

vii


Page

Richard Fallon, Jr., John Manning, DanielMeltzer, David Shapiro, Hart and WechslersThe Federal Courts and The Federal System

(6th ed. 2009) ...........................................................17

S. Rep. No. 109-14 (2005) ............................... 12, 15, 16

Victor E. Schwartz, Mark A. Behrens, LeahLorber, Federal Courts Should Decide Inter-

state Class Actions: A Call For Federal ClassAction Diversity Jurisdiction Reform, 37Harv. J. Legis. 483 (2000) ....................................... 12


9/31

1

INTEREST OF THEAMICUS CURIAE1

The Cato Institute was established in 1977 as a

nonpartisan public policy research foundation dedi-

cated to advancing the principles of individual liberty,

free markets, and limited government. Catos Center

for Constitutional Studies was established in 1989 tohelp restore the principles of limited constitutional

government that are the foundation of liberty. Toward

those ends, Cato publishes books and studies, con-

ducts conferences and forums, and publishes the

annual Cato Supreme Court Review. This case is

important to Cato because it concerns the due process

rights of absent class members and the abuse of the

class action mechanism that is a vital part of the

federal civil justice system.

------------------------------------------------------------------

INTRODUCTION AND

SUMMARY OF THE ARGUMENT

Class actions are an exception to the due process

requirement that one is not bound by a judgment in

personam in a litigation in which he is not designated

as a party or has not been made a party by service of

process. Hansberry v. Lee, 311 U.S. 32, 40 (1940).

1 Pursuant to Supreme Court Rule 37.6, counsel for amicuscertifies that no counsel for any party authored this brief inwhole or in part and that no person or entity other than amicusmade a monetary contribution intended to fund the brief spreparation or submission. Letters from the parties consentingto the filing of this amicus brief are filed with the Clerk.


10/31

2

Money damages class actions under Rule 23(b)(3),

codified in the 1966 class action amendments, were

considered at the time to be the most adventuresome

innovation. Amchem Prods., Inc. v. Windsor, 521

U.S. 591, 614 (1997) (internal quotation marks omit-

ted). Indeed, unlike the mandatory class actionsencompassed in Rules 23(b)(1) or (b)(2), concerning,

respectively, limited funds and injunctive or declara-

tory relief, Rule 23(b)(3) permits certification where

class suit may nevertheless be convenient and desir-

able. Id. at 615 (quoting Adv. Comm. Notes, 28

U.S.C. App. at 697). Accordingly, the courts must be

especially vigilant at the outset of money damages

class actions to ensure that absent class members

claims are not traded away by self-interested named

plaintiffs and their counsel.

In particular, this Court has long held that, for a

money damages class action to be certified and due

process satisfied, absent class members must be

provided notice, an opportunity to exclude themselves

from the class, and adequate representation.Phillips

Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985).

This fundamental rule presupposes that actions that

may bind absent class members not be taken before a

certification decision and an opportunity for absentclass members to decide whether to be members of

the class. The class certification requirements ensure

that the named plaintiff and counsel are adequate to

represent the class, providing further guarantee that

the due process rights of class members are protected.

Id. Indeed, representation without certification is


11/31

3

anathema to due process. It is also at odds with the

Class Action Fairness Act of 2005, Pub. L. No. 109-2,

119 Stat. 4 (2005) (CAFA), which was enacted, in

part, to prevent self-serving tactics by class action

plaintiffs lawyers who are more concerned with their

fees than with the recovery to the class. 151 Cong.Rec. S1157, 1178 (2005) (statement of Sen. Hatch)

(Abuse of the class action system has reached a

critical point, and it is time that we as a legislative

body address the problem.).

Permitting counsel for the would-be representa-

tive of an uncertified class to enter into a binding

stipulation limiting the relief sought by the class in

order to avoid federal jurisdiction violates the due

process rights of absent class members. It also con-flicts with the purpose of CAFA, inherent in its text,

to provide a federal forum that will protect absent

class members from the self-serving and abusive

tactics of plaintiffs attorneys. The possibility of later

notice to the class cannot, as a legal and practical

matter, cure such a fundamental violation of absent

class members rights.

------------------------------------------------------------------

ARGUMENT

I. Due Process Requirements Preclude Pre-

Certification Stipulations that Trade

Away Class Members Claims

Like other devices that attempt to trade away

absent class members claims so that a class action


12/31

4

may proceed in a preferred forum, pre-certification

stipulations violate absent members due process

rights.

This Courts seminal decision in Shutts holds

that due process in a money damages class action

requires that an absent class member receive notice

plus an opportunity to be heard and participate in the

litigation, that he be provided with an opportunity

to remove himself from the class, and that the

named plaintiff at all times adequately represent the

interests of the absent class members. Shutts, 472

U.S. at 812; seeMullane v. Cent. Hanover Bank &

Trust Co., 339 U.S. 306, 314-15 (1950). These re-

quirements are fundamental because the right to be

heard ensured by the guarantee of due process haslittle reality or worth unless one is informed that the

matter is pending and can choose for himself whether

to appear or default, acquiesce or contest. Richards

v. Jefferson County, Ala., 517 U.S. 793, 799 (1996)

(quotingMullane, 339 U.S. at 314). To the extent that

adequacy of representation alone may suffice to

protect absent members rights, it is constitutionally

insufficient where the interests of those class mem-

bers who had been a party to the prior litigation were

in conflict with the absent members who were thedefendants in the subsequent action.Id. at 801.

These principles have led the Court to reject

mandatory class actions under Rules 23(b)(1) and

(b)(2) when the plaintiffs objective is aggregated

money damages. See, e.g., Ortiz v. Fibreboard Corp.,

527 U.S. 815, 846 (1999). The Court unanimously


13/31

5

reaffirmed that holding in Wal-Mart Stores, Inc. v.

Dukes, 131 S.Ct. 2541, 2559 (2011), rejecting an

attempt to limit damages to back pay claims, so as to

fall under the requirements of a Rule 23(b)(2) manda-

tory class action, because it created the possibility

. . . that individual class members compensatory-damages claims would beprecluded by litigation they

had no power to hold themselves apart from, in

violation of the Due Process Clause.

Historically, the tactics used by named plaintiffs

attorneys to obtain certification for suspect money

damages class actions have not been limited to dis-

guising those actions as limited fund or injunctive or

declaratory relief actions, but have extended to

trading away (in whole or in part) the claims ofabsent class members. This includes trimming causes

of action or remedies in an effort to achieve certifica-

tion, without regard to the potential preclusive effect

of their decisions on absent class members. See, e.g.,

Pearl v. Allied Corporation, 102 F.R.D. 921, 922-23

(E.D. Pa. 1984) (refusing to allow selective pleading of

claims); Feinstein v. Firestone Tire and Rubber Co.,

535 F. Supp. 595, 606 (S.D.N.Y. 1982) (finding that

the named plaintiff s tailoring of claims came at the

price of presenting putative class members withsignificant risks of being told later that they had

impermissibly split a single cause of action);Krueger

v. Wyeth, Inc., No. 03-cv-2496, 2008 WL 481956, at *2-

4 (S.D. Cal. Feb. 19, 2008) (denying certification

where the named plaintiff s attempt to split off

claims of class members who had actually suffered


14/31

6

injuries revealed her to be an inadequate class repre-

sentative). See alsoArch v. American Tobacco Corpo-

ration, Inc., 175 F.R.D. 469, 480 (E.D. Penn. 1997)

([N]amed plaintiffs who would intentionally waive or

abandon potential claims of absentee plaintiffs have

interests antagonistic to those of the class.).

Plaintiffs attorneys have employed similar

tactics to attempt to evade federal jurisdiction in

favor of state courts that may be friendlier to class

actions and less protective of absent members rights.

This includes arbitrarily breaking up a claim into

separate causes of action, each covering discrete

periods dating from the beginning of the statute of

limitations period and each asserting damages below

$5,000,000. See, e.g., Freeman v. Blue Ridge PaperProducts, Inc., 551 F. 3d 405, 406, 408-09 (6th Cir.

2008) (ordering aggregation where plaintiffs counsel

created five separate nuisance classes, each covering

a different six-month interval and stipulating to

recovery just below the CAFA jurisdictional thresh-

old); Hubbard v. Electronic Arts, Inc., Nos. 2:09-CV-

233, 2:09-CV-234, 2011 WL 2792048, at *7 (E.D.

Tenn. July 18, 2011) (followingFreeman); Tanoh v.

Dow Chemical Co., 561 F.3d 945, 955 (9th Cir. 2009)

(denying removal of seven toxic-tort suits, each withfewer than 100 plaintiffs); Anderson v. Bayer Corp.,

610 F.3d 390, 392-93 (7th Cir. 2010) (denying removal

of four interrelated classes, each with fewer than 100

plaintiffs).

What these tactics have in common is that they

serve to advance the interests of named plaintiffs and


15/31

7

their counsel by abrogating or even discarding the

claims of absent class members, in blatant violation

of our deep-rooted historic tradition that everyone

should have his own day in court. Richards, 517

U.S. at 798 (quotingMartin v. Wilks, 490 U.S. 755,

762 (1989)). The case at bar, in which the namedplaintiff stipulated to a damages amount for the class

below the $5 million CAFA threshold to avoid federal

jurisdiction, exemplifies this conflict.

II. Due Process Requires Satisfaction of Rule

23 Criteria, Including Adequacy of Repre-

sentation, Before Absent Class Members

May Be Bound

In the class-action context, [constitutional dueprocess] limitations are implemented by the proce-

dural safeguards contained in Federal Rule of Civil

Procedure 23. Taylor v. Sturgell, 553 U.S. 880, 901

(2008). Compliance with those safeguards thereby

assumes a constitutional dimension and must be

achieved before non-named class members legal

rights may be determined.

Consistent with this principle and its precedents,

the Smith Court rejected the novel and surely

erroneous argument that a nonnamed class member

is a party to the class action-litigation before the class

is certified under Rule 23. Smith v. Bayer Corp., 131

S.Ct. 2368, 2380 (2011) (quotingDevlin v. Scardeletti,

536 U.S. 1, 16 n.1 (2002) (Scalia, J., dissenting)). It

recognized that certification decisions matter because


16/31

8

the Rule 23 requirements measure whether the

named plaintiff and counsel adequately represent the

interests of the class, such that class members may

be fairly subject to res judicata.Id. at 2381 n.11.

As Shutts emphasizes, the Due Process Clause

. . . requires that the named plaintiff at all times

adequately represent the interests of the absent class

members. 472 U.S. at 812 (citingHansberry, 311

U.S. at 42-43); see also Restatement (Second) of

Judgments 4(1), at 393 (1982) (nonparty may be

bound only when his interests are adequately repre-

sented). The Federal Rules of Civil Procedure imple-

ment this requirement. Rule 23(a)(4) provides that

the named plaintiffs must fairly and adequately

protect the interests of the class. See also Amchem,521 U.S. at 625. It also imposes the same require-

ment on the named plaintiffs counsel. Fed. R. Civ. P.

23(g)(4).

But fair and adequate representation is precisely

what is missing when a named plaintiff and his

counsel are so keen to have a class certified in a

friendly forum that they sacrifice potential damages

for the class in order to achieve that goal.2Accordingly,

2 The importance of adequate representation for absentclass members is underscored by the ability of absent memberswho were not adequately represented to collaterally attack aclass judgment and thereby escape its res judicata effect. InDowChemical Co. v. Stephenson, 593 U.S. 111, 112 (2003), an equally-divided Court affirmed the Second Circuits decision that itwould violate due process for a global settlement that did notaddress future claimants claims to have res judicata effect in

(Continued on following page)


17/31

9

such stipulations limiting class-wide damages not

only raise the risk of unfair and inadequate represen-

tation, they reveal that it is likely in a given case. The

requirements of due process therefore preclude hold-

ing a damage-limiting stipulation to be binding on

absent class members, unless and until the namedplaintiff has demonstrated adequacy of representation

that is, after class certification.

Notwithstanding this clear violation of absent

class members due process rights when binding

decisions are made for them by a named plaintiff and

his counsel prior to class certification, the circuit

courts are divided on the rights of absent class mem-

bers in these circumstances. See, e.g., Rolwing v.

Nestle Holdings, Inc., 666 F.3d 1069 (8th Cir. 2012)(upholding named plaintiff s counsels stipulation to

avoid federal jurisdiction as binding and sufficient to

defeat removal under CAFA); Frederick v. Hartford

Underwriters Ins. Co., 2012 WL 2443100 (10th Cir.

June 28, 2012) (holding that a plaintiff cannot conclu-

sively avoid federal removal jurisdiction under CAFA

by a statement of intention not to seek more than

$4,999,999.99 on behalf of the putative class); Back

Doctors Ltd. v. Metro. Prop. & Casualty Ins. Co., 637

barring future claimants from proceeding. See Stephenson v.Dow Chem. Co., 273 F.3d 249, 259-61 (2d Cir. 2001). As theSecond Circuit explained, the due process inquiry (and part ofthe Rule 23(a) class certification requirements) involves as-sessing adequacy of representation and intra-class conflicts. Id.at 261.


18/31

10

F.3d 827, 830 (7th Cir. 2011) (holding that the amount

a named plaintiff is willing to accept does not bind

absent class members and therefore does not ensure

that the case will remain below the CAFA threshold);

Lowdermilk v. U.S. Bank Natl Assn, 479 F.3d 994,

996, 999 (9th Cir. 2007) (requiring the legal certaintytest, notwithstanding the allegations in the com-

plaint, in order to guard the presumption against

federal jurisdiction and preserve the plaintiff s pre-

rogative, subject to the good faith requirement, to

forgo a potentially larger recovery to remain in state

court.); Smith v. Nationwide Prop. & Cas. Ins. Co.,

505 F.3d 405, 407 (6th Cir. 2007) (holding that a

disclaimer in a complaint regarding the amount of

recoverable damages does not preclude a defendant

from removing the matter to federal court);Mangunov. Prudential Prop. & Cas. Ins. Co., 276 F.3d 720, 724

(5th Cir. 2002) (finding it improbable that the

named plaintiff can ethically and unilaterally

waive the rights of the absent class members).

The result is that, depending entirely on where a

suit is brought, absent class members may find their

claims traded away before the minimum require-

ments of due process have received any consideration.


19/31

11

III. The Eighth Circuits Approach Is Contrary

to CAFAs Text and Purpose of Protecting

Absent Class Members Due Process

Rights

CAFA was principally directed at ensuring that ab-

sent class members due process rights were protectedagainst the tactics of class action plaintiffs attorneys

who do not truly represent their interests. It should

be interpreted, consistent with its plain meaning, to

further that aim. By contrast, the Eighth Circuits

approach, as applied in this case, establishes a loop-

hole for plaintiffs attorneys seeking to return to the

pre-CAFA status quo.

Prior to CAFA, in the absence of federal court

oversight, class action litigation had evolved into anabusive instrument primarily used in product liabil-

ity and mass tort cases to reward plaintiffs lawyers.

John Coffee, Jr., Class Action Accountability: Recon-

ciling Exit, Voice, and Loyalty in Representative

Litigation, 100 Colum. L. Rev. 370, 371-72 (2000)

([W]here the plaintiffs attorney was once seen as a

public-regarding private attorney general, increas-

ingly the more standard depiction is as a profit-

seeking entrepreneur, capable of opportunistic actions

and often willing to subordinate the interests of classmembers to the attorneys own economic self inter-

est.). Plaintiffs attorneys learned they could game

the system by focusing their litigation efforts on

certain favorable state-court venues through a meth-

od of forum-shopping designed to avoid federal court

rooms in favor of more lenient county courthouses,


20/31

12

including magnet jurisdictions. S. Rep. No. 109-14,

at 10 (2005).

Not surprisingly, abuses occurred when state

courts [were] asked to adjudicate complex and high-

stakes cases involving interstate claims. Victor E.

Schwartz, Mark A. Behrens, Leah Lorber, Federal

Courts Should Decide Interstate Class Actions: A Call

For Federal Class Action Diversity Jurisdiction

Reform, 37 Harv. J. Legis. 483, 510 (2000). Plaintiffs

attorneys identified hot spots of local bias, or magnet

venues, for bringing class actions, notwithstanding

that the magnet jurisdictions had little or no connec-

tion to the underlying disputes or interstate policy.3

Instead of complex litigation involving important

interstate issues taking place in federal court, na-tional policy debates unfolded on the steps of state

3 Madison County, Illinois, for instance, surged to the top ofthe list of magnet jurisdictions. The 725-square mile county in arural southwest corner of the state transformed almost over-night into a class action boomtown. In 1998, Madison Countywas the site of two class action filings, both of which certifiednationwide classes. John Beisner, Jessica Davidson Miller,Theyre Making a Federal Case Out of It . . . In State Court , 25Harv. J. L. & Pub. Poly at 169. Within two years, plaintiffsattorneys had taken the hint and Madison County received 39

class action filings in 2000, 74 percent of which were filed onbehalf of proposed nationwide classes.Id. Madison County, hometo less than one percent of the U.S. population, became groundzero for national policy on important issues from car repairs totelecommunications to plumbing licensure. 151 Cong. Rec.H685, 686 (2005) (statement of Rep. Keller) ([T]he movieBridges of Madison County was a love story. The Judges ofMadison County would be a horror flick.).


21/31

13

courthouses with no connection to the cases.Beisner,

supra n.3, at 169.4

Through artful pleading to avoid removal to fed-

eral court, plaintiffs attorneys increasingly sought

preferred state-court venues to litigate their nation-

wide class claims, raising concerns of pervasive abuse

and that claimants rights were being ignored. See

Davis v. Cannon Chevrolet-Olds, Inc., 182 F.3d 792,

798 (11th Cir. 1999) (concurring with remand to state

court even though [p]laintiffs attorneys are increas-

ingly filing nationwide class actions in various state

courts, carefully crafting the language in the petitions

or complaints in order to avoid removal to federal

courts). Inside those magnet venues, abusive tactics

persisted, and foremost among them was disregardfor due process rights.5 151 Cong. Rec. S1157, 1172

4 The ill effects of state-court influence over national policywere illustrated in the Illinois case ofAvery v. State Farm Mut.

Auto Ins. Co., 746 N.E.2d 1242 (Ill. App. 2001). In that case, thetrial court purported to dictate insurance laws nationwide byholding that an insurer in a nationwide class action violatedIllinois law with respect to replacement service parts eventhough other states laws were in direct conflict with the hold-ing. 151 Cong. Rec. S1157, 1172 (letter by Walter Dellinger); 151Cong. Rec. H685, 687 (statement of Rep. Goodlatte) (State

Farm was put in a position of being in a court in Illinois inwhich they were going to have the decisions of the 50 Stateinsurance commissioners, none of whom had any problem withthis policy, overturned by one court judge who was not evenexperienced in terms of handling insurance policies[.]).

5 Frequently during the era of magnet jurisdictions, state-court venues approached class certification with lax standardsthat reflected a laissez-faire attitude toward the due process

(Continued on following page)


22/31

14

(statement of Sen. Grassley) (The magnet State

courts . . . certify huge classes that involve claims

that are completely dissimilar, to the detriment of

both plaintiff and defendant. That ends up being a

due process problem.).

While plaintiffs attorneys greatly benefited by

keeping their cases in state court, class members

suffered. Plaintiffs attorneys engaged in claim

shaving, which involved stipulations to waive claims

not unlike the damages stipulation in this case

thereby keeping complaints under the $75,000 dam-

ages threshold required for diversity jurisdiction,

while extinguishing the claims of absent class mem-

bers. The Class Action Fairness Act of 1999: Hearing

on S. 353 Before the Subcomm. on Adm. Oversightand the Courts of the S. Comm. on the Judiciary,

106th Cong. (1999) (Hearings on S. 353) (statement

of Stephen G. Morrison) ([I]t happens every day

class counsel sacrifice the claims of unnamed class

members in order to keep their cases in state

courts.).

rights of not only out-of-state defendants but also unnamed classmembers. Hearings on S. 353, Prepared Statement of Stephen

G. Morrison. Out-of-state defendants, for instance, sufferedgross abuses known as drive-by class certifications, in whichjudges certified claims for class treatment before defendantscould even respond to certification motions. Id.; 151 Cong. Rec.H685, 689 (statement of Rep. Goodlatte) (The existence of Statecourts that broadly apply class certification rules encouragesplaintiffs to forum shop for the court that is most likely to certifya purported class.).


23/31

15

When plaintiffs either won or their attorneys

settled for large settlements, the big pay day be-

longed to the attorneys while class members general-

ly received little or nothing, often in the form of

promotional coupons to purchase more products from

the defendants. S. Rep. No. 109-14, at 15; 151 Cong.Rec. H685, 690 (statement of Rep. Goodlatte) (The

loser in the system is the class member whose claim

is extinguished by the settlement at the expense of

counsel seeking to be the one entitled to recovery of

fees.).

In general, CAFA sought to combat the prolifera-

tion of state court class action settlements with terms

that primarily benefited plaintiffs lawyers, at the

expense of absent class members, and the lack ofmeaningful oversight or scrutiny of such settlements.

It included express procedures to be followed by the

federal courts in evaluating coupon settlements. 28

U.S.C. 1712. It also included specific procedures

requiring notice of a settlement to appropriate state

and federal officials in order to ensure protection to

absent class members rights. 28 U.S.C. 1715; S.

Rep. No. 109-14, at 35 (The Committee believes that

notifying appropriate state and federal officials of

proposed class action settlements will provide a checkagainst inequitable settlements in these cases.); id.

(This provision is intended to combat the clientless

litigation problem by adding a layer of independent

oversight to prohibit inequitable settlements.).

More specifically, CAFA sought to protect absentclass members, as well as defendants, by putting an


24/31

16

end to forum shopping. See John Massaro, TheEmerging Federal Class Action Brand, 59 Clev. St. L.Rev. 645, 670 (2011). It did this by directly addressingthe tactics that plaintiffs attorneys had been using toavoid federal jurisdiction. See S. Rep. No. 109-14, at

27 (describing how CAFA will make it harder forcounsel to game the system. ). In this way, suitsseeking settlements of primary benefit to plaintiffsattorneys could be channeled into federal court anddealt with appropriately. S. Rep. No. 109-14, at 4 (Tomake matters worse, current law enables lawyers togame the procedural rules and keep nationwide ormulti-state class actions in state courts whose judgeshave reputations for readily certifying classes andapproving settlements without regard to class mem-ber interest.); 151 Cong. Rec. H685, 686 (statementof Rep. Davis) (This legislation will put an end totrial attorneys forum shopping to find a friendlycourt where settlement awards will line their pocketwhile hitting victims and consumers in their pocket-books.).

CAFA also expanded federal jurisdiction in the

class action context, calling only for minimal diversity

and an aggregate amount in controversy of more than

$5,000,000. 28 U.S.C. 1332(d)(6). The expansion of

federal jurisdiction likewise was seen as a means ofprotecting absent class members:

Arguments favoring such expansion focusedon claims that many state courts were toowilling to certify inappropriate, even frivo-lous, class actions, and then to approve settle-ments that were either forced on defendants


25/31

17

in order to avoid litigation, or benefited thelawyers for the plaintiff class far more thanthe class members themselves, or both.

Richard Fallon, Jr., John Manning, Daniel Meltzer,

David Shapiro, Hart and Wechslers The Federal

Courts and The Federal System 1368 (6th ed. 2009).

The text of the statute reflects Congresss inten-

tion that federal courts, in assessing jurisdiction, look

beyond the artifices of pleading to consider the reality

of proposed class actions. Rather than rely on named

plaintiffs representations as to the value of claims,

the statute directs that the claims of the individual

class members shall be aggregated to determine

whether the matter in controversy exceeds the sum or

value of $5,000,000. 28 U.S.C. 1332(d)(6). In thisway, the statute provides broad federal jurisdiction

over class actions, including those that may be con-

trary to absent class members interests and that

could proceed only under the lax certification re-

quirements prevailing in certain states.

This case demonstrates the risk to absent class

members posed by misinterpretation of CAFAs juris-

dictional provisions. The named plaintiff s efforts to

remain in Arkansas state court through a stipulation

of damages purportedly made on behalf of not only

himself, but a class he does not represent and may

never represent, directly undermines the rights of

absent class members. Class certification may be

easier to obtain in Arkansas state court because

Arkansas does not apply the rigorous analysis of the


26/31

18

class certification criteria required by this Court. See

Simpson Housing Solutions, LLC v. Hernandez, 347

S.W. 3d 1, 17 (Ark. 2009) ([T]he federal courts apply

a rigorous-analysis test for class actions, which this

court has consistently rejected.). Nor does it allow

any argument as to merits of the case, even when anunderstanding of the merits is critical to determining

the propriety of class certification.Id. at 21.6

Were the

district courts remand order allowed to stand, there

is a very real risk that absent class members will

suffer the consequences.

IV. Post Hoc Notice and Other Actions Can-

not Cure Due Process Violations Stem-

ming From Binding Decisions Made

Prior to Class Certification

The idea that a stipulations impact on absent

class members should be ignored in assessing federal

jurisdiction because there may be an opportunity for

an absent class member to opt out of the class or

there may be a later decision on the adequacy of

representation by a state court is out of step with the

practical realities of class action litigation, antithet-

ical to the principles underlying CAFA, and ultimately

dismissive of absent class members due process

6 That view of class certification is equally contrary to theview of this Court. Shutts, 472 U.S. at 811 ([I]f the forum . . .wishes to bind an absent plaintiff concerning a claim for moneydamages or similar relief at law, it must provide minimalprocedural due process protection.).


27/31

19

rights. The assumption that a stipulation to forfeit

class members rights actually causes them no harm,

because subsequent proceedings may cure any injury,

is false. The possibility that a state court may even-

tually allow class members to opt out or may decide

to deny class certification on adequacy grounds doesnothing to prevent the abuses that CAFA was enacted

to prevent namely, lawyer-driven suits that place

financial gain for lawyers over recovery for the class.

As an initial matter, when a named plaintiff and

his counsel make what they deem to be a binding

decision for a putative class before they have been

appointed class counsel under Rule 23, they are

acting without authority to do so. See, e.g., Smith, 131

S.Ct. at 2279-80. That is a fundamental violation ofthe due process rights of absent class members that

cannot be cured through an after-the-fact finding that

the named plaintiff and counsel adequately represent

the interests of the class or through a notice to the

class that attempts to explain away how these class

members rights were violated. Cf. id. at 2280 (Nei-

ther a proposed class action nor a rejected class

action may bind nonparties.). See also Richards, 517

U.S. at 801 (citingHansberry, 311 U.S. at 40;Eisen v.

Carlisle & Jacquelin, 417 U.S. 156, 177 (1974);Mullane, 339 U.S. at 319).

The possibility that a state court may ultimately

find the named plaintiff or his counsel inadequate

provides no greater protection. For one thing, the

possibility that the class representative or his counsel

will ultimately be deemed inadequate should prevent


28/31

20

a conclusion that recovery above the stipulated

amount is impossible to a legal certainty, because it

means that another class member or lawyer who is

not personally bound by the stipulation may later be

appointed to represent the class. SeeBack Doctors,

637 F.3d at 830-31 (A representative cant throwaway what could be a major component of the classs

recovery. Either a state or a federal judge might insist

that some other person, more willing to seek punitive

damages, take over as representative.).

In addition, permitting the infringement of class

members rights on the basis that a state court will

eventually determine the adequacy of counsel is, as a

practical matter, insufficient to protect absent class

members rights. Even if class certification is ulti-mately denied, as opposed to a substitute plaintiff or

counsel being appointed as a representative, that

could occur years after the decision on federal juris-

diction. At that point, any class members interested

in pursuing class litigation would have to begin anew,

assuming that their claims were not time-barred.

Nonetheless, some courts have permitted a

named plaintiff and his counsel to make binding

decisions for a class on the theory that once the class

is certified and notice is sent, those absent classmembers who disagree with the named plaintiff s

decisions can simply opt out of the class. See, e.g.,

Goodner v. Clayton Homes, No. 4:12-cv-04001, 2012

WL 3961306, *5 (W.D. Ark. Sept. 10, 2012) (If a

forum-state class member doesnt like the stipulation,

he must either opt-out or live with the stipulation. . . .


29/31

21

Members whose claims arise out of state presumably

have the same two choices.); Smith v. Am. Bankers

Ins. Co., No. 2:11-cv-02113, 2011 WL 6090275, *8

(W.D. Ark. Dec. 7, 2011) ([P]utative class members

may simply opt out of the class and pursue their own

remedies if they feel that the limitations placed onthe class by Plaintiff are too restrictive.);McClendon

v. Chubb Corp., No. 2:11-cv-02034, 2011 WL 3555649,

*5 (W.D. Ark. Aug. 11, 2011) (Any arguments De-

fendants may have as to the named Plaintiffs ade-

quacy as class representatives may be addressed

after remand. Furthermore, class members who do

not agree with the way Plaintiffs have structured

their claims are free to opt out of this action and

bring their own suit structured in the manner they

see fit.); Tuberville v. New Balance Ath. Shoe, Inc.,No. 1:11-cv-01016, 2011 WL 1527716, *4 (W.D. Ark.

Apr. 21, 2011) ([I]t is important to keep in mind that

the Plaintiff in the case at bar has not yet been

named class representative, nor has the class been

certified by any court. It also follows that putative

class members could simply opt out of the class and

pursue their own remedies. . . .).

Other courts have found it sufficient that the

state court, on remand, may consider the effect of adamages-limiting stipulation on class members when

assessing the adequacy of counsel or the class repre-

sentative. Murphy v. Reebok Intl, Ltd., No. 4:11-cv-

214-DPM, 2011 WL 1559234, *3 (E.D. Ark. Apr. 22,

2011) (Reeboks attack on the stipulations goes more

to Murphys adequacy as a class representative and


30/31

22

counsels adequacy as class counsel than to good faith.

These issues can be addressed after remand.);

Thomasv. Countrywide Home Loans, No. 3:11-cv-399-

WKW, 2012 WL 527482, at *4 n.4 (M.D. Ala. Feb. 17,

2012) ([S]uch a restriction might be a reason to deny

class certification; in other words, the state courtcould conclude, after remand, that Hall is not an

adequate class representative. This court should not,

however, force a plaintiff to seek more money than

she wants.) (quotingHall v. ITT Financial Services,

891 F. Supp. 580, 582 (M.D. Ala. 1994)).

But due process requires more than an uncertain

possibility of relief years in the future, particularly

when absent class members may face the risk of

losing their claims altogether. If a stipulation iseffective, after all, its effect may be to throw away

what could be a major component of the classs recov-

ery. Back Doctors Ltd., 637 F.3d at 830-31. See also

Manguno, 276 F.3d at 723-24 ([I]t is improbable that

[the named plaintiff] can ethically unilaterally waive

the rights of the putative class members to attorneys

fees without their authorization.). Or a stipulation

may winding up costing the class money, in the form

of attorneys fees. SeeBass v. Carmax Auto Super-

stores, Inc., No. 07-0883-cv-W-ODS, 2008 WL 441962,at *2 (W.D. Mo. Feb. 14, 2008). In such circumstances,

post hoc cures may not provide absent class mem-

bers relief.

------------------------------------------------------------------


31/31

23

CONCLUSION

Permitting plaintiffs attorneys to artificially

limit the amount of damages sought on behalf of a

putative class, prior to certification or any evaluation

of the adequacy of representation, violates the due

process rights of absent class members and under-mines Congresss attempt to protect those rights

against unscrupulous legal tactics. Amicus therefore

urges this Court to hold that such stipulations can

have no bearing on federal jurisdiction under CAFA.

This Court should reverse the district courts order

remanding this case to Arkansas state court.

Respectfully submitted,

ILYASHAPIRO

CATO INSTITUTE1000 Mass. Ave., N.W.Washington, D.C. 20001(202) [email protected]

DAVID B. RIVKIN, JR.

Counsel of RecordANDREW M. GROSSMANBAKER & HOSTETLER LLP1050 Conn. Ave., N.W.Washington Sq., Suite 1100Washington, D.C. 20036(202) [email protected]

DEBORAH H. RENNERJOHN B. LEWISPAUL G. KARLSGODTCASIE D. COLLIGNON

ROBIN D. POWELLBAKER & HOSTETLER LLP

Counsel for Amicus Curiae

the standard fire insurance co. v. knowles, cato legal briefs

Documents